17 August 2012 15:50 [Source: ICIS news]
LONDON (ICIS)--The European ultra low sulphur diesel (ULSD) markets have tightened further as a result of reduced arbitrage opportunities from both Asia and the US into Europe, a source said on Friday.
The effect has been exacerbated by a fire last week at Chevron’s refinery in Richmond, California, increasing US demand for diesel. It is thought that the unit could be out of action for up to six months.
“Yes, it’s tight, especially on the smaller cargoes,” a distillate trader said. “It’s partly the [Chevron] refinery fire.”
Both the European diesel barge market and the cargo market have already been tight for several weeks as a result of unfavourable economics limiting arbitrage opportunities into Europe.
Coupled with increased demand for diesel during the European summer, particularly in advance of the London Olympics, the effect was magnified.
This tightness is now being exacerbated as Asian refineries head into a maintenance period, strengthening the market there and further reducing exports to Europe.
Similarly, reduced US diesel supplies, stemming from the Chevron fire, mean that even fewer US volumes are likely to be fixed for Europe.
There is talk in the market of Asian diesel that would normally head to Europe instead being shipped straight to the US.
However, the trader was not convinced this will occur.
“I’ve heard the rumour,” the source said. “But it’s expensive to ship from Asia to the US. The freight rates would be high.”
With the European refinery maintenance period also set to get underway, the outlook for European diesel appears strained.
The situation is said to have – quite unusually - opened an arbitrage from the European ULSD barge market to the European cargo market.
“There’s an arb from barges to cargoes,” the trader said. “There’s no water in the Rhine [river], so they [the barge market] can’t export. They’re selling to the cargo market, as the cargo [market] is struggling to find supplies, but has got demand.”
Early on Friday afternoon ULSD cargo premiums over September ICE gasoil stood at $39-40/tonne.
On Thursday afternoon, ULSD barges traded at $29-33/tonne over September ICE gasoil.
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